A ‘drag’ on open-ended commercial property funds has prevented investors from exploiting the full benefits of investing in commercial property, Rob Burdett, fund manager at F&C, told FTAdviser.
Despite the sector’s recent popularity, multi-manager Mr Burdett believes that investors need to be aware of what he terms a “cash drag”, due to high proportions of cash in portfolios from a recent influx of inflows preventing investors from capitalising on growth elements of the funds.
This drag in open-ended property investing has come about as a result of the sheer volume of investors moving in to the same funds in search of income yield at once, he said.
Mr Burdett said: “If everyone is doing the same thing there will be a cash drag. If you have 95 per cent invested and then you receive a large inflow – it takes a while to buy property due to illiquidity – so your cash will sit their earning a little over 1 per cent. The property sector yield begins with 3 per cent.
“If the portfolio is carrying a lot of cash, then you are missing out on growth. We continue to see high investments into commercial property – investors need to watch out for it.
“Property has recovered the ground it lost since 2008 and in theory real yields compared to cash and bonds are attractive but you need to look deeper than that and be careful where you are investing.”
Mr Burdett’s view that investors should be wary has not dissuaded other multi-asset and multi-managers from investing in the asset class.
Nick Samouilhan, multi-asset fund manager at Aviva Investors, said that transaction costs are preventing him from trading in and out of the asset class too frequently.
He said: “We think that much of the gain has been had, though there is still a bit more to go. However, this is not an asset class to tactically trade in and out of given the huge transaction costs involved.”
However, the most cautious fund in the firm’s multi-asset range has a 10 per cent holding in property, compared to a usual 5 to 7 per cent, with similar levels of overweight to property in the rest of the fund range.
Mr Samouilhan said: “We think there is a bit more to go in the asset class over the next few months given the continued search for yield by many market participants, with the backwind provided from the capital growth.
“However, we will be using the cash flows into our multi-asset funds to dilute this exposure down over the coming year, scaling down the property position while not incurring any trading costs.”
Tony Lanning, portfolio manager at JPMorgan’s Fusion fund range, sees value in commercial property.
He said: “We continue to increase exposure to UK commercial property on the belief initial yields look attractive relative to the risk free rate and underlying rental growth and occupancy rates should be supported by stronger UK growth.
“Since we added property to the Fusion funds it has added incremental value month-on-month. We did not buy it as a short-term trade as we believe the opportunity set for property as a core holding makes sense at the current time.”
Caspar Rock,Caspar Rock, chief investment officer at Architas, an independent asset management business, owned by AXA Wealth, added that the speed of recovery in UK commercial property caught some investors out.
He said: “We have been gradually adding to our property allocation since the end of last year, and the asset class has steadily recovered from its post 2008 crisis lows.
“The speed and scale of the recovery in UK commercial property, which began around May 2013 and returned around 11 per cent for the year as a whole, caught a few investors out. This recovery has continued into 2014 with only a minor slowdown in January as the market paused for breath and took in the scale of December’s strongly positive returns.
“Property managers now talk of a similar, if not higher total returns for 2014, possibly up to 15 per cent. It should not really be a surprise though, with low interest rates and a general lack of enthusiasm for fixed income, steering investors towards alternative sources of income, including property.
“As such we have been gradually increasing our exposure to property over the past year or so compared to a 10 per cent model in the Architas fund of funds. With such a weight of money chasing opportunities and a relatively tight supply of new prime properties, the market really is positioned for further increases.”
